5 Retirement Tax Deadlines to Plan For

To take advantage of tax perks and avoid tax penalties, you need to meet IRS deadlines. Some retirement savings accounts must be utilized by Dec. 31, 2010, to get a tax break this year, while with others you have until April 15, 2011, to make your 2010 tax year deposits. Here are five important retirement tax deadlines to keep in mind:

December 31, 2010. Many retirement tax moves must be made by the end of the calendar year. Contributions to 401(k) and 403(b) plans need to be deposited by Dec. 31, 2010, to qualify for a tax break this year. Workers can defer taxes on up to $16,500 in an employer-sponsored retirement account in 2010, a limit that jumps to $22,000 for employees age 50 or older this year.

Seniors were able to skip taking required minimum distributions from retirement accounts in 2009. But retirees over age 70 1/2 must take distributions from their pre-tax IRAs and 401(k)s this year by Dec. 31, 2010. Those who fail to withdraw the correct amount must pay a 50 percent tax penalty and regular income tax on the amount that should have been withdrawn.

Investors who wish to convert a pre-tax IRA to a Roth IRA or a traditional 401(k) to a Roth 401(k) in tax year 2010 must initiate the conversion by Dec. 31, 2010. Those who convert to a Roth in 2010 have the option to pay the income tax on the transfer this year or pay tax on 50 percent of the conversion amount in 2011 and the second half in 2012. In future years, all of the income tax will be due in the year of the transfer. Many people have already begun to utilize this one-time tax perk. Financial services firms including Bank of America Merrill Lynch and Vanguard have reported a significant uptick in conversions this year. Nearly 100,000 retirement savers converted traditional IRAs to Fidelity Roth IRAs in the first half of 2010, four times more than were rolled over during the same time period in 2009. The removal of income limits for Roth IRA conversions this year also contributed to the increase in transfers.

March 1, 2011. The simplest way to convert a traditional IRA to a Roth IRA is to have the trustee of your current account roll it directly into the new account. However, if you have an IRA distribution made out to you, you have about two months to deposit the full amount withdrawn into a Roth IRA before you will incur any early withdrawal penalties. “The money doesn’t necessarily have to go in the Roth in 2010, but you need to convert it within 60 days of the withdrawal,” says IRA expert Ed Slott, founder of irahelp.com and author of “Stay Rich for Life!: Growing & Protecting Your Money in Turbulent Times.” If you receive the distribution on Dec. 31, 2010, you have until March 1, 2011, to deposit your money in a Roth IRA and have the transfer qualify as a 2010 conversion.

April 1, 2011. Seniors who turn 70 1/2 in 2010 have the option to delay their first required distribution until April 1, 2011. However, retirees who delay the 2010 distribution until next year must take two IRA withdrawals in 2011: the 2010 withdrawal by April 1, 2011, and the 2011 withdrawal by Dec. 31, 2011.

April 15, 2011. IRA contributions for the 2010 tax year must be made by April 15, 2011. Many people wait until the last minute to make their deposits. Almost half (45 percent) of all IRA contributions are made in the 28 days leading up to the tax deadline, and a quarter of new IRAs are opened in April, according to Fidelity IRA data. If you make a contribution between January 1 and April 15, 2010, you should tell the financial institution whether you want the contribution to apply to the 2010 or 2011 tax year. “I actually tell my accountant that I want to make my contributions count as deferred income for 2010,” says Bedda D’Angelo, a certified financial planner and president of Fiduciary Solutions in Durham, N.C., about her typically last-minute April IRA contributions. If you do not specify which tax year you want the contribution to apply to, the bank can assume the contribution is for the current year. Early tax filers can claim a traditional IRA contribution before the deposit is actually made, but the money must be there by the due date of your return.

October 17, 2011. If you wish to undo a 2010 Roth IRA conversion, you have until Oct. 17, 2011, to move your money back to a traditional IRA. To do this you will need to amend your 2010 tax return and subtract the amount that you put back in the pre-tax account from your 2010 gross income. Says Slott: “If you convert any time in 2010, you will have until October 17, 2011, to change your mind for any reason.”

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